World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, January 22, 2010

Equity futures are mostly flat to down a little in the overnight session, DOW and S&P activity are shown below:

The dollar and bonds are roughly flat overnight, both oil and gold are down some more. Oil is back into the $75 range and gold is approaching the $1,080 support level, there’s more support for gold about $1,050, then again at the $1,000 level. We are definitely seeing deleveraging of the speculative plays.

Amazing how fast it comes off, isn’t it? More than 400 points on the DOW and 44 on the S&P gone in just the past couple of days. Pretty bearish action overall, the volume is much heavier on these down moves than on the up moves. Remember, volume confirms price. There was, and still is, a historic divergence in place with volume shouting that the primary direction is still lower.

Yesterday Obama got up and supported “the Volcker Plan” whose stated intention would be to limit commercial banks to staying only in banking and out of the hedge fund and speculation business! That would be terrific and should have happened a looooonnnng time ago. This is the very reason our markets have been completely taken over by them and their massive computers. But the worst part is that they have been using YOUR money to trade against YOU. So YES, absolutely, commercial banks have NO business speculating and levering up.

Now the real questions are; do they mean it, can they implement it, and if they do, are there going to be so many loopholes that it effectively means nothing but allows the Administration to look tough once again? Well, we need simply look at the past year and what is a clear trend is Obama standing up and delivering a beautiful oration with the correct principles, but then the action never materializes. Again, the timing of the announcement yesterday on the same morning as Goldman’s earnings was absolutely orchestrated to play the public. I DON’T ENJOY BEING PLAYED, do you? In fact I’m sick of it.

Since everyone has probably seen the mainstream twist on the proposals, I want to share an alternative perspective from Business Insider:

Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.

The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.

A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business.

The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers. Even proprietary trading, for instance, can become related to customer service if it is done through internal hedge funds in which some outside clients are permitted to invest.

One insider at a bank pointed to JP Morgan Chase’s ownership of the hedge fund Highbridge Capital. It is thought that under a strict “no hedge funds” rule, Highbridge would have to be sold off. But under the rule proposed by the Obama administration, Highbridge can be retained by JP Morgan because outside clients are permitted to invest in it.

A still more devious way is to have a banks own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs is rumored to be considering this approach. (Goldman isn't commenting on the regs right now.)

“This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said.

“The market is getting this wrong by selling off the megas,” a person at another bank said.

So, there are many who believe that it simply will not come to pass and then there are those who believe if it does come to pass you can drive a truck through the loopholes. The power structure of America is simply turned upside down, again, until that is changed we will continue to pay the price for it.

It's difficult to know what's real and what's Memorex in these markets, that's for sure. That's why technical analysis is so important. Forget what they are telling you, what is the volume pattern telling you?

Then there’s the possibility that if Obama is really going to support Volcker and really lets him get in there and close up the loopholes, then the banks with their money and computers will just flip the direction of their bets changing the direction to down to pressure Obama until he shouts "Uncle." It works nearly every time, and it's worked that way throughout history every time the bankers get in charge of creating this nation's money. Again, this is why what’s so important is WHO controls the quantity.

And yesterday a huge decision was handed down by the Supreme Court that got very little play in the media. Hmmm… wonder why? Could it mean more money for them? Hmmm.

WASHINGTON (AP) -- The Supreme Court has ruled that corporations may spend freely to support or oppose candidates for president and Congress, easing decades-old limits on their participation in federal campaigns.

By a 5-4 vote, the court on Thursday overturned a 20-year-old ruling that said corporations can be prohibited from using money from their general treasuries to pay for their own campaign ads. The decision, which almost certainly will also allow labor unions to participate more freely in campaigns, threatens similar limits imposed by 24 states.

It leaves in place a prohibition on direct contributions to candidates from corporations and unions.

Critics of the stricter limits have argued that they amount to an unconstitutional restraint of free speech, and the court majority apparently agreed.

"The censorship we now confront is vast in its reach," Justice Anthony Kennedy said in his majority opinion, joined by his four more conservative colleagues.

However, Justice John Paul Stevens, dissenting from the main holding, said, "The court's ruling threatens to undermine the integrity of elected institutions around the nation."

Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor joined Stevens' dissent, parts of which he read aloud in the courtroom.

The justices also struck down part of the landmark McCain-Feingold campaign finance bill that barred union- and corporate-paid issue ads in the closing days of election campaigns.

Advocates of strong campaign finance regulations have predicted that a court ruling against the limits would lead to a flood of corporate and union money in federal campaigns as early as this year's midterm congressional elections.

The decision, written by Justice Anthony Kennedy, removes limits on independent expenditures that are not coordinated with candidates' campaigns.

The case also does not affect political action committees, which mushroomed after post-Watergate laws set the first limits on contributions by individuals to candidates. Corporations, unions and others may create PACs to contribute directly to candidates, but they must be funded with voluntary contributions from employees, members and other individuals, not by corporate or union treasuries.

Can’t think of a worse thing to do for America than to allow corporations to spend unlimited funds on campaigns! This is 180 degrees out. Again, the power structure is already upside down, this only cements it there and makes it far worse. Of course individuals cannot compete with the money these large special interests are able to generate. There is NO balance of power, and that statement is true right through the judicial system.

Notice that they limit contributions to PACs, but meanwhile corporations and other large special interests are spending unlimited funds on lobbying and in support of political campaigns. This is making people slaves to these interests instead of making those entities work for the people. The very purpose of corporations and allowing capital to concentrate has been lost.

Freedom of speech? Are corporations and other business entities really people with the same rights in that regard? We need to find some type of balance in this matter, and I believe that the political reforms suggested in Freedom's Vision would help to balance that structure out fairly without putting onerous restrictions on business, and in fact the other provisions would greatly help and support business by clearing out large portions of the debt that is choking our economy.

With a large percentage of earnings from gambling in the marketplace, the negative implications for the big banks of Volcker’s proposed limits really hit the financials yesterday. Many think this is overdone. Here’s a 6 month chart of the XLF, you can now see what looks like a double top in place and note the very heavy volume on the sell off yesterday:

Remember, the large banks are still riddled with bad debt and they are still hiding toxic derivatives all over the place that have been mispriced via deceptive accounting practices and mark to model. Well, if that’s all they have, it isn’t much is it? Oh yes, they still have very wide spreads to arbitrage, but how can they take advantage of that when all their potential customers are already saturated with their poisonous debts? People don’t want and can’t service more debt, and the banks look at them and finally realize that you can’t just give debt away to just anybody.

And yet the pundits are telling you there’s never been a better time to buy the banks, that they are a steal, a bargain.

A general pattern is emerging with earnings coming out. Some are strong and are beating estimates, these are mainly tech companies and financials with their gambling profits and mark to fantasy accounting. The trend here is that on the beats they are being sold hard anyway. This is another indication of topping behavior. The other trend is that things in the REAL non high tech world are NOT doing well. Cargo and transportation is down below the levels of last year. GE reported a beat, but sales fell 10% year over year and “fourth- quarter net income attributable to GE fell 19 percent to $3.01 billion, or 28 cents a share, from $3.72 billion, or 36 cents.” GE is actually up about 3%, one of the few companies to actually increase on their down 19% “beat.”

Now let’s look at a discretionary consumer item, Harley Davidson Motorcycles. Here is where we find the debt saturated citizen motoring into the proverbial debt wall. Remember that Buffett just threw big money into Harley last year. How are sales? “Sales fell 40 percent to $764.5 million.” Forty percent! After falling off a cliff the year before that? No wonder I am getting so many emails spamming me about their sales. “The loss of $218.7 million, or 94 cents a share, compared with net income of $77.8 million, or 34 cents, a year earlier.” Again, this is the real economy here not one that is marked to any model and a drop in sales of 40% in one year says it all.

Can’t you just see the psychology at work? Isn’t this exactly the psychology that played out during the Great Depression? A 50+% retrace, oh we’re saved, ohhh what’s happening, oh it’s only a correction, 10 to 20% is healthy, see it’s coming back, well maybe just another couple percent correction, not to worry it’s coming back, ahhh what the heck just happened?

Wave C During the Great Depression:

It’s called debt saturation, it’s what occurs at the peak of a credit (debt) bubble when incomes are no longer able to support even more credit. The banks managed to super saturate the entire globe with debt.

It’s simple from here. If they want this debt backed money game to continue, then they must let enough debt default through deflation that they can then do it all again. If they are not smart enough to allow deflation to continue, then they are simply ushering in a new money system. That is obviously the path we are headed down just observing their actions and the math at play.

So what’s going on technically right now?

In the very short term, like 60 minute time frame and down, the oscillators are all oversold meaning that we could see some sideways or bounce to work that off. However, that’s going up against what looks like it could be a wave 3, possibly of wave 1 down of C down. Here’s a 60 minute chart of the SPX, you can see that we have just fallen beneath what was support back into the area that was the sideways zone where we spent so much time. That means the volume support in this area is heavy:

Here is a 3 month daily snapshot of the SPX at the close yesterday, it was sitting right on support after having convincingly broken down from the megaphone pattern I had been showing. Note, too, that it closed just above the 50dma and the bottom Bollinger as well:

The DOW actually closed below the 50dma and below the lower Bollinger, a place that means we probably need a break to give the Bollingers and oscillators time to catch up to the action. Note the fresh sell signals on the daily oscillators and the heavier volume:

Here’s a 6 month chart of SPY, the S&P 500 ETF. Yesterday’s volume was the heaviest on this chart. If you draw a horizontal line from yesterday’s close back in time, you will find that we are now already back to the same price level we were at in mid November:

And here’s a chart of the VIX. Note that we closed above the upper Bollinger yesterday and are continuing to push it up today. Very bearish action, remember this follows the VIX market sell signal we received, that was a very important clue, wasn’t it? Those who were long and did not listen are paying the price:

Events are unfolding quickly. More deleveraging in Europe, Portugal being the latest to have their debt come under heavy pressure as the waves continue to propagate from Dubai, Greece, the Baltic States, etc. Those who were thinking we were in the clear, simply were not logically keeping their eyes on the debt and on the math thereof.